12 Global Gaming Business FEBRUARY 2019R
egional casino stocks might be the
place for equity investors to be in
2019.
The group sold off a stunning 37 percent last
year despite strong business trends, acquisitions
that promised to add to earnings and manage-
ment teams focused on continuing to improve
operating margins.
The results are stocks stuck in cheap valuation
ranges around seven and eight times EBITDA in
a business environment that calls for higher prices
and in a world where real estate investment trusts
are buying casinos at 10 times and higher.
Now, there is no predicting the future. A re-
cession could turn the rosy fundamentals south. A
company can make bad decisions.
But what is seen and known spells out one
word: opportunity.
As of this writing, regional stocks are re-
bounding nicely. In part that is because investors
are seeing that the sell-off created prices discon-
nected from the strength and prospects of the un-
derlying businesses.
It also has helped that
some equity analysts have
been pounding the table on
regional casino operators.
Carlo Santarelli of
Deutsche Bank is one of the
regional bulls. He published
a research note pointing out
their strengths, and two in-
teresting facts: 1) Regional casino stocks have
never dropped two years in a row, and 2) Their
stock prices have always correlated with consumer
confidence, which is running at the highest levels
since 2000.
Santarelli also noted, as I mentioned above,
that the low valuations might make casinos attrac-
tive targets for REIT acquisitions, thus giving in-
vestors the opportunity to buy low and sell high.
Another analyst who has issued a strong call
on regional casino operators is Chad Beynon of
Macquarie.
Beynon, among other things, cited strong
cash flows, defensive nature in the stocks, and
lack of exposure to China that has worried in-vestors of other stocks and sectors. This is an ideal
time to invest in regional operators, he said.
It also is worth noting that several regional com-
panies enjoy some of the fastest-growing markets in
the country.
Red Rock Resorts and Golden Entertainment
are highly concentrated in Las Vegas, the nation’s
fastest-growing metro. Monarch Casino is in Reno
and greater Denver, two other fast-growing metros.
Eldorado, likewise, has considerable exposure to
Reno and Denver. Boyd has big stakes in the Las
Vegas locals market and Downtown Las Vegas.
Each company also has its unique growth story.
Monarch is transforming its Black Hawk, Colorado,
casino into a destination-quality resort. Red Rock is
making big investments in the Palms and Palace Sta-
tion.
Penn National, Eldorado and Boyd also have
been buying gaming operations in collaboration with
the REITs, giving them both more revenues and op-
portunities to raise profitability by reducing costs.
Golden likewise has been a buyer, but with theadded benefit of also buying the real estate, giving it
appreciating assets, and without having to pay rent
to REIT property owners.
It also is sometimes worth paying attention to
what really smart people do. Mario Gabelli, for exam-
ple, has become a major shareholder in Full House
Resorts, owning 8.54 percent of the company.
As small as Full House is—market cap just
under $60 million—Gabelli’s investment is pocket
change for him. But it illustrates that one of the
most successful stock investors of our times sees
enough value that he’s willing to invest in a micro
cap.
Santarelli and Beynon have target prices gener-
ally 25 percent to 35 percent above the stock priceswhen they issued their early January reports.
But one company offers much greater re-
turns—Golden Entertainment. Santarelli has a $
target on Golden and Beynon $34. The stock is
around $17.70 as this column is being written,
making it a double if they are right.
Readers of this space know we are fans of
Golden and can see it at $40 and higher over time
if the company is right about its growth strategies,
executes on them and gets a proper valuation.
The company has transformed through acquisi-
tion from around $45 million in EBITDA to what
in several years should be $250 million, all with few
new shares being issued.
The great majority of that business is in Las
Vegas, where Golden owns the Stratosphere, two
locals casinos and a growing network of highly
profitable taverns, and in Laughlin, Nevada, 90
miles south of Las Vegas, where it will have three
properties that control around 40 percent of the
$500 million gaming revenue market.
That is a lot of exposure to the fastest-growing
metro in the country, and a lot of potential if
Golden succeeds in fulfilling the Stratosphere’s po-
tential and making Laughlin a getaway for the 2.
million residents of the Las Vegas Valley.
Finally, when considering regional casinos, one
has to look at the three gaming REITs—Gaming &
Leisure Properties, VICI Properties and MGM
Growth Properties.
If regional casino companies succeed, the
REITs succeed. If regional casino valuations don’t
rise, REITs can step in and buy the properties at
prices attractive to owners.
And with each purchase, the REITs add to their
rental income, boosting profitability and stock
prices. In other words, they combine reliable recur-
ring revenues with growth opportunities.
Investors also get cash every three months in
the form of dividends. Consider their dividend
yields: GLPI 8.25 percent, VICI 6.2 percent, MGP
6.7 percent. Combined with their growth
prospects, that’s a lot of potential total return.Frank Fantini is the editor and publisher of Fantini’s
Gaming Report. For a free 30-day trial subscription email
[email protected].FANTINI’S FINANCE
Close to Home
A big drop in the price of regional casino stocks
makes them attractive to investorsBy Frank FantiniGolden Entertainment has
transformed through acquisition
from around $45 million in
EBITDA to what in several years
should be $250 million, all with
few new shares being issued.“
”
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